Crypto Cost Basis: FIFO, Specific Identification and the Records You Need

Property, not currency

The starting point is a classification, not a calculation. The IRS digital assets page states that for U.S. tax purposes digital assets are considered property, not currency. The same page says the basis of property is its cost, and that the basis of a digital asset is generally its cost in U.S. dollars.

Property treatment is what makes cost basis the central number. A disposal is compared against what the disposed units cost, and the difference is gain or loss. The holding period matters too, because property held for more than a year is treated as long-term, but the basis is the figure that determines whether there is a gain at all.

Two questions behind every disposal

Every disposal of part of a holding raises the same pair of questions:

1. Which units were sold? If a wallet holds bitcoin bought at three different prices, the answer decides which cost leaves the wallet.
2. What did those units cost, in dollars? That is the basis, adjusted for anything the tax rules require.

When the entire holding is sold at once, the two questions collapse into one and the arithmetic is simple. The difficulty appears when a taxpayer sells part of a position that was accumulated over time, because the units are fungible on the chain but not identical in basis.

The specific-identification route

The IRS virtual currency FAQs address the choice directly. Q39 asks whether a taxpayer who owns multiple units acquired at different times and prices can choose which units are sold. The answer is yes, subject to a condition: the taxpayer must be able to specifically identify which units are involved in the transaction and substantiate the basis in those units.

Q40 then defines what identification means. There are two accepted routes:

The records route comes with a list of required fields, and the list is the practical part of the rule:

1. The date and time each unit was acquired.
2. The basis and the fair market value of each unit at the time of acquisition.
3. The date and time each unit was sold, exchanged or otherwise disposed of.
4. The fair market value of each unit when disposed of, and the amount of money or the value of property received for each unit.

The word “time” appears alongside “date” in three of the four items. That is not incidental: when several purchases happen on the same day at different prices, a date alone cannot distinguish them.

The FIFO default

Q41 covers the case where identification does not happen. If the taxpayer does not identify specific units, the FAQs say the units are deemed sold in chronological order beginning with the earliest unit purchased or acquired — first in, first out.

FIFO is therefore not a method a taxpayer chooses; it is what remains when a specific identification is not made or cannot be substantiated. The distinction matters because the two methods can produce very different gains from the same sale. In a position accumulated over years, FIFO tends to dispose of the oldest and cheapest units first, which usually produces a larger gain than selling the most recently acquired units.

What changed on January 1, 2025

The FAQs above are framed for transactions before 2025. Rev. Proc. 2024-28 describes the rules that followed. It states that §§ 1.1012-1(h) and (j) of the 2024 final regulations apply to all acquisitions and dispositions of digital assets on or after January 1, 2025, and that those rules apply the specific identification or FIFO rules to units held within a single wallet or account.

Two consequences follow. The unit of analysis is now the wallet or account rather than the taxpayer’s entire holdings, and specific identification must be made no later than the date and time of the sale. The revenue procedure describes the requirement as identifying, on the taxpayer’s books and records, the particular units to be disposed of by reference to an identifier — such as purchase date and time or the purchase price paid — sufficient to identify the basis and holding period.

That is a timing rule as much as a record-keeping rule. A specific identification constructed after the fact, from memory or from a cleaned-up spreadsheet, does not meet a requirement that the identification be made by the time of the sale.

The transition safe harbor

The revenue procedure exists because taxpayers who had been using a universal or multi-wallet approach needed a way to move to wallet-by-wallet accounting without inventing basis. It provides a safe harbor under §1012(c)(1) that allows unused basis to be allocated to wallets or accounts holding the same number of remaining units, as of January 1, 2025, based on the taxpayer’s records.

The mechanics have three features worth knowing:

• Two allocation styles. A specific unit allocation records the characteristics of the unused basis assigned to each pool of assets in each wallet or account. A global allocation instead prescribes an order in which basis units are assigned, applied across the taxpayer’s wallets.
• The standing-order requirement. If a sale happens before the global allocation is complete, the revenue procedure allows specific identification of remaining units only through a standing order or instruction communicated to the broker, or a standing instruction recorded in the taxpayer’s books and records. Other forms of identification are not sufficient for that period.
• The completion deadline. The revenue procedure’s example describes a taxpayer who identifies and maintains records sufficient to show the remaining units and unused basis as of January 1, 2025 before April 15, 2026 — the due date for the 2025 federal return — and completes the allocations within the same window.

The safe harbor is a transition rule, not a permanent method. It is aimed at the specific problem of basis that was tracked without regard to which wallet held the units.

Form 1099-DA does not replace the records

The IRS digital assets page notes that broker reporting on Form 1099-DA is required beginning with transactions on or after January 1, 2025, under final regulations covering brokers that take possession of the digital assets being sold, including custodial trading platforms and certain hosted wallet providers.

A reporting form is an input, not a substitute for the underlying records. The form states what a broker reports; the basis claimed on a return has to be supportable from the taxpayer’s own records, especially for units acquired elsewhere, transferred between wallets, or held across more than one venue. The record list in Q40 is still the specification, even where the reporting obligation now sits with a broker.

A records checklist

The list is unglamorous, and that is the point. The rules in both the FAQs and the revenue procedure reward records made at the time of the transaction. A taxpayer who can produce the four Q40 fields for every unit does not need to argue about which method applied; a taxpayer who cannot will be pushed onto FIFO by default.

Risk note. This article describes U.S. federal guidance read from the IRS digital assets page, the virtual currency FAQs and Rev. Proc. 2024-28 on 2026-10-26. It is not tax advice. Rules, forms and thresholds change, and individual circumstances differ; consult a qualified tax professional before relying on any method described here.